If China opts to buy Iran oil, Brent may hit $40: BofAML

DUBAI, August 4, 2019

While Brent is expected to retain the price of $60 per barrel forecast for next year, any move by China to reinitiate Iran crude purchases could send oil prices into a tailspin, said the Bank of America Merrill Lynch in a new report.

In the extreme, a combination of weaker demand (0.25 to 0.5 million b/d lower) and the return of up to 1.5 million b/d of Iran oil would weaken our balances by up to 2 million b/d. Other things being equal, Brent could drop by $20-30/bbl, said BofAML’s "Commodity Update: Oil at the edge of a cliff".

Looking into 2020, global oil and supply demand balances embed practically no Iran oil exports, 1.0 million barrels per day (b/d) of global demand growth, and a modest oil surplus of 0.4 million b/d, according to the report.

Two factors further complicate price direction if China steps up Iran oil purchases. First, Saudi Arabia may cut oil production deeply to stabilize global oil prices. Second, the US Navy could opt to block the movement of Iranian vessels to China.

As markets wait for a Chinese response to the latest US tariff threat, oil volatility is set to rise again, said BofAML.

New Trump tariffs could hurt oil demand, boost supply

Global oil consumption growth is running at the weakest levels in nearly a decade. Protectionism has taken a big toll on global industrial activity. BofAML estimates that the latest round of US tariffs on China could weaken global oil demand by an additional 250 to 500 thousand b/d.

For now America has captured a bigger piece of a shrinking global economic pie, so global rates have fallen even as the SPX neared record highs. Yet two conditions underpin the concept that rising US tariffs on China could result in increased US welfare: China´s limited ability to retaliate and the relatively low price elasticity of manufactured Chinese goods. China does not respond well to threats and has the ability to retaliate in indirect ways against US trade measures, BofAML added. – TradeArabia News Service